GBP/USD retreats to 1.3780 area with markets bracing for the Fed
- GBP/USD pulls back to levels near 1.3780 from four-year highs at 1.3868.
- The Dollar trims losses on Wednesday as investors brace for the Fed's decision.
- Strong UK Shop Prices Index data underpinned the Pound's rally on Tuesday.
The Pound is trimming gains against the US Dollar on Wednesday, trading a few pips above 1.3780 at the time of writing, down from its highest levels in more than 4 years, at 1.3868. The Greenback has regained some of the ground lost over the last few days, as investors scale down USD shorts ahead of the Federal Reserve’s (Fed) monetary policy decision.
US President Trump’s comments, praising the current U.S. dollar value on Tuesday, added pressure on a currency that was already on the ropes. The US’s erratic trade policies, growing government spending, and the attacks on the Fed have undermined the Dollar, which has lost nearly 3.5% in just over a week.
Fewer jobs and higher prices hurt US consumer's sentiment
US economic data added pressure on the US Dollar on Tuesday. The Conference Board’s Consumer Sentiment Index fell to an 11-year low on concerns about jobs and higher prices, while the ADP weekly report revealed that net employment creation slowed down for the third consecutive time in the week of January 3.
Investors' focus shifts now to the Fed’s monetary policy decision. The bank is almost certain to leave interest rates unchanged and to hint at a steady monetary policy in the near term. Trump, however, might be tempted to attract attention by disclosing the name of Chairman Powell’s replacement at the end of his term in May.
The British Pound, on the contrary, has been in a positive trend, underpinned by the strong retail consumption and business activity data seen last week, while the strong Shop Prices Index released on Tuesday provided additional support this week.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
